Is it really easy to evade taxes with cryptocurrency?
Sensationalist headlines claim that the vast majority of cryptocurrency investors aren’t paying their taxes. However, a closer look at the numbers casts some doubt on this narrative.
In this article, we’ll break down the percentage of investors that are accurately reporting their transactions to the IRS. We’ll also discuss the IRS’s attempts to fight crypto under-reporting and explain how investors can stay on top of tax reporting!
What percent of crypto investors are paying their taxes?
There have been multiple studies that have been conducted to find out what percentage of crypto investors are paying their taxes. However, it’s important to take a closer look at the methodology of each study before drawing conclusions.
Are as many as many 99% of crypto investors not filing their taxes?
One study recently claimed that more than 99% of crypto investors do not report their taxes. It’s important to note that this study was based on questionable methodology, which estimated how many investors paid their taxes based on search volume keywords.
It’s very likely that this 99% figure is a severe overestimate. There’s no evidence that search volume for related terms is directly correlated with tax filings. In addition, millions of investors across the world use crypto tax software specifically designed to report crypto gains, losses, and income — which implies that the 99% figure is likely inaccurate.
How many crypto investors are really paying their taxes?
To get a better gauge of how many crypto investors are reporting their taxes, let’s take a look at a study with reliable methodology.
A study commissioned by CoinLedger directly asked crypto investors chosen through random sampling whether they reported crypto on their taxes. The survey was conducted by YouGov anonymously online — meaning that investors had no incentive to lie.
31% of cryptocurrency investors do not report cryptocurrency on their taxes. Meanwhile, 55% of investors said they do report cryptocurrency on their taxes, while another 17% said they ‘prefer not to say’.
The CoinLedger survey shows that a majority of investors are law-abiding. However, it’s clear that a substantial portion are not paying their taxes — which may lead to issues down the road as the IRS beefs up crypto tax enforcement.
Are cryptocurrency investors actively choosing to evade taxes?
It seems that many investors are not reporting their taxes for a simple reason: they’re unaware how cryptocurrency is taxed.
The IRS first released guidance on cryptocurrency taxes in 2014. Still, many new entrants to the space are simply unaware of how to report taxes on their transactions.
The primary reason that more than 50% of non-taxpayers in the CoinLedger survey gave for not reporting their taxes is ‘I haven’t made a profit on cryptocurrency.’ This seems to imply that investors are unaware that cryptocurrency losses should be reported (and can come with tax benefits).
Another 18% of non-reporters said ‘I didn’t know that cryptocurrency was taxable.’
It can be difficult to report your cryptocurrency transactions on your taxes — especially if you’re using multiple wallets and exchanges. Still, it’s the responsibility of the taxpayer to be aware of the tax consequences of transactions and to accurately report capital gains and income from cryptocurrency.
How the federal government is fighting underreporting
Regardless of the reasons why crypto investors are not reporting their taxes, one thing is clear: the government is serious about cracking down on crypto tax evasion.
Centralized exchanges like Coinbase will soon be required to report all capital gains and losses to customers and the IRS through 1099 forms.
In addition, the IRS has worked with contractors like Chainalysis to identify on-chain tax fraud. It’s estimated that these efforts have led to the seizure of more than $10 billion in Bitcoin.
It’s likely that the IRS will have more resources at its disposal to fight tax evasion in the near future. The Inflation Reduction Act gave over $80 billion to the tax agency — which will be used to hire thousands of new employees and modernize the agency’s systems.
It’s unknown exactly how much of the IRS’s new-found resources will be specifically dedicated towards crypto tax enforcement. However, IRS commissioners have claimed that cryptocurrency is a major contributor to America’s tax gap — making it likely that cryptocurrency will be a focus for the agency in the years ahead.
How can I stay on top of cryptocurrency taxes in the future?
To make sure that you avoid future trouble with the IRS, you should take the following steps.
- Account for all your wallets and exchanges: To properly report your cryptocurrency taxes, you’ll need to account for all of your wallets and exchanges. This includes wallets you have not used for multiple years. Remember, you’ll need to know the original purchase price of your crypto to properly calculate your capital gains.
- Keep complete records of your crypto transactions: Keep detailed records of all of your transactions. This includes the date of each transaction as well as the fair market value of your crypto at receipt and disposal.
- Consider crypto tax software: If you have trouble manually keeping records, you can consider getting started with crypto tax software. Platforms like CoinLedger can connect with your wallets and exchanges and help you keep track of your tax liability on an ongoing basis!
- File a crypto tax amendment: If you haven’t reported your crypto transactions in the past, you should file a tax amendment with a record of your previous transactions. The IRS is famously more lenient to investors who make a good-faith effort to report their taxes.
- Get a crypto tax accountant: If you’re having trouble reporting your crypto taxes on your own, you should reach out to a tax professional. If you choose this route, make sure to find an accountant with knowledge of the cryptocurrency ecosystem!
The cryptocurrency ecosystem is maturing — unfortunately, many crypto investors are still not aware how to report their taxes. By taking the right steps to report your transactions, you can avoid future issues with the IRS!